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Fact 14.2.1
Two firms,FastNet and SmartCast are the only Internet providers in a city.They have identical costs and one firm's service is a perfect substitute for the other firm's service.The industry is a natural duopoly.FastNet and SmartCast decide to collude and agree to share the market equally.
-Refer to Fact 14.2.1.What is the result if both firms cheat on the agreement?
A)Both firms make an economic profit that is less than if they had both complied with the agreement.
B)Economic profit of both firms is maximized.
C)Both firms are playing a game of chicken.
D)Only one firm is playing a game of chicken.
E)Market output decreases.

Question

Quizplus · Accepted Answer

If both firms cheat on the agreement, they will end up with a lower economic profit than if they had both complied with the agreement. This is because they will end up competing with each other, driving down prices and increasing output, which will result in lower profits for both firms.

Use the Information Below to Answer the Following Questions